Media  Global Economy  2018.02.16

The Next Step for TPP 11: No Need to Seek the Return of the U.S.

The article was originally posted on Webronza on January 26, 2018

Signing of the TPP 11 agreement

The TPP 11 agreement is expected to be signed in Chile on March 8 now that the holdout, Canada, has compromised. Finally, the large free trade agreement (mega-FTA) led by Japan will take effect. Since Japan has also agreed to the large Japan-EU FTA, Japan will participate in two mega-FTAs. Through mega-FTAs, Japan will become connected with the large economies of the EU, Canada, Australia, Mexico and others.

The only other mega-FTA in the world is NAFTA (North American Free Trade Agreement) between the U.S., Canada and Mexico (the EU as well as South America's Mercosur are customs unions that set common tariffs for non-member nations). Those currently under negotiation are the TTIP between the U.S. and the EU, and the RCEP (Regional Comprehensive Economic Partnership), which has the participation of China and India, but talks over the former are effectively suspended and Japan is a participant in the latter. In other words, Japan can be said to be leading the world's mega-FTA negotiations. If an agreement can be reached on the RCEP, then Japan will also become connected with the economies of China and India.

We can say that both TPP 11 and the Japan-EU FTA are the fruits of Abenomics. The Abe administration, which as of 2016 was opposed to my proposal regarding TPP 11, changed its mind last spring following the inauguration of the Trump administration. The Abe administration led the TPP 11 negotiations and brought about the expected signing of the agreement. It is unusual for Japan to lead multilateral talks.

Don't ask the U.S. to return to the TPP

However, I am dissatisfied about one part of the latest TPP 11 agreement: validity of items that other countries conceded at the request of the U.S. was frozen until the U.S. returns, in hopes that the U.S. will rejoin. In other words, the TPP will be returned to its original state should the U.S. rejoin. There is no penalty for the U.S., which selfishly withdrew and forced the other 11 nations, including Japan, to unnecessarily negotiate again for TPP 11.

As was the case when China joined the WTO, if the U.S. wants to join TPP 11, then the existing 11 members normally would be able to make various demands to the U.S. On the other hand, the U.S. would not be able to make demands to the 11 nations. That is what negotiations for a new participant ought to be.

In other words, Japan could have demanded that the U.S. immediately scrap its automobile tariff (2.5%) instead of doing so over 25 years as agreed to in the TPP, without making further concessions on agricultural tariffs other than those in the original TPP (these actually could have been dropped altogether). Unfortunately, Japan closed the path to such negotiations. That is, in a sense, an America First policy.

At present, the U.S. imposes low tariffs. In addition, as seen in automobile tariffs, Japan gained almost no additional improvements in access to the U.S. market through the original TPP negotiations. So even if the U.S. does not participate in the TPP, Japanese companies will be able to export to the U.S. market as they do now with no major trade barriers. Japan gains little from a U.S. return to the TPP.

U.S. President Trump's and Japan with no policy -Japanese government officials should take measures placing emphasis on the national interest rather than defending their own interests-

On the other hand, in the Japanese market, U.S. agricultural products on which high tariffs are levied will be driven out by products from nations such as Canada and Australia, which can be exported with low tariffs under the TPP. It is the U.S. that will be hurt by an exit from the TPP, not Japan. The Abe administration should simply bide its time if it wishes for the U.S. to rejoin. If the U.S. wants to return, then maybe Japan should demand that the U.S. eliminate the 2.5% automobile tariff as an inconvenience fee, under a separate provision of TPP 11.

What is the next step?

The Japanese government should be placing priority on expanding the TPP membership instead of a U.S. return. As can be seen in the example regarding U.S. agricultural products, the essence of an FTA is "discrimination" against and "exclusion" of non-member nations. A country that participates can receive lots of benefits, but one that does not participate will not only fail to enjoy the fruits of free trade but will also suffer a loss as it loses in competition with other nations. In particular, a mega-FTA can trigger a domino effect in which the number of members grows.

For this reason, immediately after the original TPP negotiations wrapped up, South Korea, Taiwan, the Philippines, Indonesia and Thailand indicated an intention to join. Given that Vietnam is a member of TPP 11, there is no doubt that more developed nations such as Thailand and other ASEAN members can join. If it participates in TPP 11, then Thailand, like Vietnam, will receive the benefit of being able to enter and expand in the Mexican rice market, which is currently dominated by U.S. farmers due to their tariff-free status under NAFTA. A similar development will take place in other markets as well.

Should the U.S., which will lose the Japanese market for agricultural products to TPP 11, demand that Japan sign a Japan-U.S. FTA, then Japan should urge the U.S. to participate in TPP 11 because Japan has shifted to a multilateral free trade agreement (mega-FTA) principle. Theoretically, compared to a bilateral FTA, a mega-FTA has fewer of the problems with FTAs as identified by international economics, such as the trade diversion effect, in which trade is diverted from a country that can supply at the lowest cost in the world to a member of an FTA, and the spaghetti bowl effect, in which the tariffs, rules and regulations for each of numerous bilateral FTA become complicated like tangled spaghetti and lead to confusion in trade.

Since this year, British newspapers have reported that the U.K., which has exited from the EU, has started considering participation in TPP 11 (this is something that I have argued for on WEBRONZA since 2016, and also proposed to high officials of the U.K. government). TPP 11 does not have geographical restrictions. Turkey, Brazil, Kenya and many others can join.

Initially, the EU did not show interest in a Japan-EU FTA. It was Japanese automakers and home appliance manufacturers that sought such an agreement because they were forced to pay high tariffs to export to the EU market while South Korean companies can export to that market tariff-free thanks to the FTA between the EU and South Korea. But with the conclusion of the TPP talks, the EU became worried that their exports of products such as cheese, wine and pork to Japan would suffer (discrimination in the Japanese market, followed by exclusion in the future). The EU thus became willing to enter into a Japan-EU FTA, which led to an agreement being reached. This is also a domino effect. In the Japanese market, the conditions of competition of U.S. agricultural products became worse than those of the EU products as well as those from the TPP members such as Canada and Australia.

The RCEP, which counts China and India among its members, cannot be expected to have high-level agreement contents like the TPP. Furthermore, the spaghetti effect will be smaller if the TPP and the RCEP are consolidated into a single TPP rather than co-existing separately. Human resources should be used for expansion of the TPP rather than for the RCEP. If the TPP is expanded, then the domino effect means that not only the U.S. but also China and India will have no choice but to consider joining. That would be the way toward realizing the "Free and Open Indo-Pacific" advocated by Prime Minister Abe.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on January 26, 2018.)